News - February 2008

• “Absolute” Mold Exclusion is Valid, Even Though Covered Water Damage is Predominant Cause of Mold
• “Pollution” Exclusion Bars Coverage For Liability Arising From Insured’s Release Of Solvent Into Public Sewer System
• Absent Prejudice, Insurer May Be Liable for Default Judgment Against Insured Arising From Insured’s Breach of Notice Clause

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"Absolute" Mold Exclusion is Valid, Even Though Covered Water Damage is Predominant Cause of Mold

The California Court of Appeal has held that even though “sudden and accidental” water damage—a covered peril—was the predominant cause of mold, a policy’s “absolute” mold exclusion was enforceable because the exclusion clearly communicated that mold “however caused” was never covered. (De Bruyn v. Superior Court (2008) 158 Cal.App.4th 1213)

Facts

Rudolf De Bruyn purchased a homeowner’s insurance policy from Farmers Insurance Exchange. The policy was written on an “all-risk” basis for the dwelling and on a “specified-peril” basis for personal property. Among other things, the policy covered losses to the dwelling and personal property caused by a “sudden and accidental discharge” of water from a plumbing system or household appliance.

The policy also included a so-called “absolute” exclusion for mold. The exclusion provided that the policy did not “under any circumstances” cover mold, even if resulting from a covered cause of loss (such as the “sudden and accidental” discharge of water from a plumbing system). Other language in the policy provided that “[w]henever … mold … occurs, the … mold … and any resulting loss is always excluded under this policy, however caused.”

De Bruyn and his family returned from a six-day vacation to find that a toilet had overflowed and damaged their home. A few days later, De Bruyn discovered that the dishwasher also had leaked. Both water leaks caused mold. De Bruyn made claims to Farmers, and Farmers paid De Bruyn for the water damage but denied payment for damage related to mold.

De Bruyn sued Farmers based upon Farmers’ denial of coverage for mold-related damage resulting from the toilet overflow and dishwasher leak. Among other things, De Bruyn alleged the “absolute” mold exclusion was invalid pursuant to California’s predominant cause doctrine.

Farmers demurred to portions of De Bruyn’s complaint, asserting that the “absolute” mold exclusion was valid and eliminated any obligation to pay for mold damage, even when mold was caused by a covered peril. The trial court sustained Farmers’ demurrer, and De Bruyn sought relief in the Court of Appeal.

Holding

The Court of Appeal affirmed, holding that the “absolute” mold exclusion was valid. The Court acknowledged that the loss involved two distinct perils—sudden discharge of water and mold—because each can occur without the other. However, the Court reiterated that the purpose of predominant cause doctrine is to bring about “a fair result within the reasonable expectations of both the insured and the insurer,” as set forth by the California Supreme Court in Garvey v. State Farm Fire & Casualty Co. (1989) 48 Cal.3d 395.

The Court also reiterated that an insurer may limit coverage to some, but not all, manifestations of a given peril, as long as “[a] reasonable insured would readily understand from the policy language which perils are covered and which are not.” (Julian v. Hartford Underwriters Ins. Co. (2005) 35 Cal.4th 747.) According to the Court of Appeal, the primary issue is whether the policy “plainly and precisely communicate[s] an excluded risk” to a reasonable insured—and Farmers’ policy satisfied that requirement.

Comment

The predominant cause doctrine continues to be one of the most complicated areas of first-party property insurance law. Because of the very broad implications of this case, it is quite possible the plaintiffs will seek review by the California Supreme Court. In the meantime, it is important to note that even the Court of Appeal noted that unduly broad language might render illusory policy provisions that purport to cover other perils. Thus, the Court carefully limited its holding to the particular facts of De Bruyn’s claim as applied to the particular language of Farmers’ policy.

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"Pollution" Exclusion Bars Coverage for Liability Arising From Insured’s Release of Solvent Into Public Sewer System

The California Court of Appeal has held that a liability policy’s “pollution” exclusion relieved an insurer of any duty to defend or indemnify its insured for liability arising from the insured’s release of a solvent into a public sewer system. (American Cas. Co. of Reading, PA v. Miller (2008) 71 Cal.Rptr.3rd 571)

Facts

Michael Miller operated a furniture stripping business in the City of Santa Monica, California. As part of his business, Miller generated wastewater containing solvents. The City issued Miller a “wastewater permit” which allowed him to discharge wastewater from his premises into the City’s sewer, but which prohibited him from discharging any solvents into the sewer.

On at least one occasion, Miller allegedly allowed wastewater containing a solvent, methylene chloride, to flow into an onsite waste sump which emptied into a City sewer. The wastewater allegedly caused serious injuries to Vicente Valenzuela, a workman who was performing some repairs in the sewer. As a result of the incident, Miller was charged with, and pled guilty to, negligent discharge of pollutants into a public sewer system.

Valenzuela filed a personal injury action Miller, alleging that Miller had negligently discharged methylene chloride into the sewer causing injuries to Valenzuela. Miller tendered Valenzuela’s personal injury action to Miller’s general liability insurer, American Casualty Company of Reading, PA. However, citing the policy’s “pollution” exclusion, American Casualty declined to defend Miller against Valenzuela’s lawsuit.

Thereafter Valenzuela settled his personal injury action against Miller. As part of the settlement, Miller assigned his rights against American Casualty to Valenzuela. Valenzuela then demanded that American Casualty pay its policy limit of $1 million.

American Casualty filed a declaratory relief action against the insured, Miller, and the third party-claimant, Valenzuela, alleging that the policy’s pollution exclusion applied and that American Casualty thus had no duty to defend or indemnify Miller against Valenzuela’s lawsuit. The trial court agreed that the pollution exclusion barred any potential for coverage in the underlying lawsuit, and thus entered summary judgment in favor of American Casualty. Miller and Valenzuela appealed.

Holding

The Court of Appeal affirmed. The American Casualty policy’s “pollution” exclusion barred coverage for bodily injury or property damage “arising out of the actual, alleged, or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ … at or from any premises … which is … owned or occupied by … any insured.” The policy defined “pollutants” as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste. Waste includes materials to be recycled, reconditioned or reclaimed.” 

Here, Valenzuela’s personal injury action against Miller was based on Miller’s alleged negligence in allowing the release or discharge of a “pollutant” (i.e., wastewater containing methylene chloride) into a public sewer system. As such, Valenzuela’s claim against Miller fell within the scope of the American Casualty policy’s “pollution” exclusion, and American Casualty thus had no duty to defend or indemnify Miller against Valenzuela’s claims.

Comment

In California, a standard “pollution” exclusion does not bar coverage for all injuries arising from toxic substances; rather, the exclusion only bars injuries arising from “events commonly thought of as pollution, i.e., environmental pollution.” (See MacKinnon v. Truck Ins. Exchange (2003) 31 Cal.4th 635.)  In this case, the appellate court concluded that the insured’s alleged act of permitting methylene chloride to be released into a public sewer constituted an act of “environmental pollution.” Because a reasonable insured would expect that the pollution exclusion would defeat coverage here, the insured was not entitled to either defense or indemnification from the insurer.

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Absent Prejudice, Insurer May Be Liable for Default Judgment Against Insured Arising From Insured’s Breach of Notice Clause

The California Court of Appeal has held that unless an insurer establishes actual and substantial prejudice, the insurer may be liable for a default judgment against its insured arising from the insured’s breach of a notice clause in the policy. (Belz v. Clarendon America Insurance Company (2007) 158 Cal.App.4th 615)

Facts

Gary Belz filed a construction defect lawsuit against Alan Namay. However, Namay failed to provide notice of the lawsuit to his general liability insurer, Clarendon America Insurance Company. As a result, Belz obtained a default judgment against Namay for $191,000.

Belz then filed a direct action against Clarendon under Insurance Code Section 11580(b) in an effort to collect on the underlying default judgment. Clarendon moved for summary judgment based solely on the following clause in its policy: “The Company shall not be liable for any cost, payment, expense or obligation assumed or incurred by an insured without the Company’s express consent. The Company further shall have no liability for any default judgment entered against any insured ... before notice to the Company giving the Company a reasonable time in which to protect its and its insured’s interests ....”. The trial court ruled that the insured, Namay, had breached this clause, and that the insurer, Clarendon, did not need to show any prejudice resulting from the breach. The trial court thus entered summary judgment in favor of Clarendon. Belz appealed.

Holding          

The Court of Appeal reversed the trial court’s ruling. The appellate court held that the italicized language was a “notice clause,” even though it was contained in the same section as and followed directly after a “no-voluntary payment provision.” According to the court, an insurer cannot avoid liability for a default judgment based on the insured’s breach of a notice clause alone. Rather, the insurer must establish actual, substantial prejudice caused by the insured’s lack of notice. The mere inability to investigate the claim thoroughly or present a defense to the underlying lawsuit does not satisfy the “prejudice” requirement. Since Clarendon failed to make a sufficient showing of actual, substantial prejudice, Clarendon’s motion for summary judgment should have been denied.

Comment

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